As a coterie of high-profile investor activists in the US dominate business news headlines around the world, a more low-key, but increasingly assertive, brand of shareholder activism is taking root in Australia.

Activist investors now control a little over $US84 billion ($93 billion) in the US, according to Hedge Fund Research, which sounds like a lot but is just a drop in the multitrillion-dollar ocean managed by passive funds.

Activist investors such as
David Einhorn
of Greenlight Capital,
Bill Ackman
of Pershing Square, and
Dan Loeb
of Third Point may not be household names, but their willingness to take on some of the biggest players around the world, and in the most public of fashions, has cemented their fame in global financial circles.

But lurking in the wings of any big success is the potential for an equally dramatic failure, which Pershing Square’s Ackman discovered with his ill-fated attempt to shake up dowdy US department store
JCPenney
.

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As he slinks off the board after failing to turn the business around, he has reportedly lost a cool $US1 billion on the bet. That failure suggests the star of investor activism may be dimming in the US.

“The fiasco may highlight not only the flaws of Mr Ackman’s approach and his force of personality, but also the limits of what shareholder activists can achieve," opined The New York Times, pointing to the fact that even after a pushy investor has muscled him or herself on to the board, they are still only one of many voices.

Three investor personalities

There are three brackets of investors, reckons Gabriel Radzyminski, who started Sandon Capital some four years ago to pursue an explicitly activist investment strategy. The first are “truly passive investors who will never say ‘boo’ to a company," he says.

Then there are those who buy companies with a view to being passive, but then when the company fails to meet its objectives or fulfil its potential they will become active agitators for change.

More recently billionaire investor
Alex Waislitz
, son-in-law of the late Richard Pratt, has announced his intention to open an activist fund.

While a strong form of investor activism may make a bigger splash on the local investment scene in the coming years – just as it appears to be flaming out in the US – a more measured but increasingly less discrete version is already taking hold Down Under and is likely to have a longer-lasting effect on the Australian funds management industry.

Lead by high-profile names such as
Geoff Wilson
, chairman of Wilson Asset Management, and
Simon Marais
, managing director of Allan Gray, institutional investors appear increasingly willing to take on management and, especially, boards in order to achieve what they see as better outcomes for shareholders.

The backdrop to what may be the dawn of a new age of shareholder engagement in this country is the market crash of 2008. The subsequent underperformance of many listed companies showed up the ineffectiveness of company directors, who proved unwilling or unable to rein in executive pay (which continued to rise as profits fell), to demand strategic change, or to sell off undervalued assets.

Andrew Lumsden, a partner at law firm Corr Chambers Westgarth, thinks there will be an uptick in shareholder activism in the coming years.

“Partly it depends on what happens in the local market," says Lumsden, who has a long-standing interest in this area and who counts Geoff Wilson as a client. “

A tougher economic environment does mean normally passive investors are more likely to be engaged around performance issues."

Lumsden says he has “a lot of connections" with overseas activist funds, and says he “certainly has a sense that people are looking at the Australian market with interest".

In Australia, the trend towards greater shareholder engagement and legislation empowering small investors – such as the two-strike and no vacancy rules – lend themselves to be exploited by activist investors, adds Lumsden.

The increasing weight of money in the superannuation sector is also changing the nature and colour of share registries. “Something which is unique to Australia is that very soon industry funds will dominate the registers of many listed companies," says Allan Gray boss Marais, whose firm manages $3.6 billion in Australia.

“And given their heritage in the union movement they really should stand up for the ordinary worker.

“[The industry funds] have been the people most supportive of us and Australia could be well ahead of the US in terms of a change in [attitudes towards corporate governance]," he adds.

The softly spoken veteran investor Wilson describes this increasing assertiveness among the professional investment community as "fantastic" and “an incredibly favourable trend".

“The most important thing that boards and management have to remember is that the shareholders own the company, and they are only there at the behest of shareholders," says Wilson.

“Unfortunately, in a lot of instances they see it the other way around – that they are the important ones and the people that own the company are less important."

Wilson is quick to separate himself from the corporate raider crowd, but concedes that there would be very few other institutional investors who would be prepared to commit the time and expense to calling an extraordinary general meeting (EGM) to change a board.

Yet Wilson and his team have done exactly that on “four or five" occasions in the past couple of years, springing from investments in names such as listed investment companies
Indian Equities
and
Signature Capital
,
RHG
(the old Rams), and, most recently, Australian Infrastructure Fund (AIF).

“When RHG were going to delist we jointly called an EGM with another fund manager to change the board," says Wilson. “Signature Capital was doing a buyback at what we believed was the wrong price."

In the case of AIF, after the sale earlier this year of the fund’s major airport assets to the
Future Fund
, the board made the decision to liquidate the fund and pay back its shareholders.

Wilson, who owns 18.7 per cent of the company, disagreed. He says the first “of a number of meetings" with the board was on July 1, when he expressed his view that the company shouldn’t be liquidated and that a better course of action would be to repay investors who wanted out through a buyback and to then keep the company going.

He told the board he was prepared to call an EGM to replace them, and he made good on the commitment on August 7.

All of which sounds like it could have made for some heated discussions – perhaps even some raised voices?

“No, no, they are all very civil discussions over cups of tea," chuckles Wilson. He points out that only a very few of these disputes enter the public arena, describing them as “the tip of the iceberg".

Wilson is understandably coy around potential future actions, but does point to a small company, of which he owns about 5 or 6 per cent.

“The managing director gets paid too much," says Wilson.

“We’ve indicated we’re not happy with how much he gets versus the size of the company, but without somebody else who might do a better job as MD it’s hard to work out whether you want to up the ante."

Nevertheless he maintains he is not an activist investor. “We bought shares in all these companies because we thought they were cheap."

Allan Gray’s head of Australian equities Simon Marais is probably the highest profile activist investor in the local funds management industry, and he doesn’t shy away from the title.

Although he is more likely to label himself a contrarian, he has demonstrated a willingness to publicly pressure boards and management teams to take actions that he believes are in the best interest of shareholders.

“Investors entrust their money to us to get the best returns, and there are two components," he explains.

“The first is to try and select good investments, but the other is that once you’ve done that you’ve got to make sure that things stay on track." Marais is highly critical of the selection process of company directors.

“How do they get appointed? It’s often they know somebody already on the board, or they play golf at the same club – it’s a crazy situation."

“There’s no competitive tension for board seats. I think if they have six positions they should nominate 10 or 20 people and then you vote for them."

“We’ve tried to put a few people on boards and it’s inordinately difficult; even when we are big shareholders the chairman just doesn’t want to do it – and that’s that!"

Marais points to the challenges he had putting his nominee on the board of salmon farming business
Tassal Group
. “Two board members resigned in protest!" he says, still amazed.

He adds that while it was “fiercely resisted at the time", it has turned out “quite well" for the company, in which he still owns close to 19 per cent.

Marais is a value-style investor, but he admits he would consider an investment in a company on the basis that he could release value through agitating for change.

“All shareholders should be actively involved making sure the people they put on the board are good people and that the company acts sensibly," he says. But there are limits.

“It would be crazy if a fund manager were involved in the day-to-day running of a company, say, a retailer, because at the end of the day, what do we know about retail?

“But it is fair to stand back after five years and say ‘look guys, you’ve had a fair run, your results are not good – what are you going to do about it?’"